JoeTaxpayer

Today, I’m happy to offer a guest post from Alban:

Wherever possible we all like to avoid paying someone to do something, which we could just as easily have done ourselves. However, too often you find that you thought you could do without paying an expert for their help, only to realize that the task was actually harder than it looked. One area you don’t want to take that risk is with your investments because if you realize too late that you did need the assistance and expert advice of an investment manager, you can find there is little left to invest.

Features and Benefits of Managed Investment Funds

When you work with a financial planner you will be getting a diversified portfolio of funds, where your money has been invested in thousands of different stocks, across different asset classes and currencies. However, when you go it alone most people will only buy around 20 stocks, in one asset class, in one currency.

There is not a lot of middle ground between managed investment funds and DIY investments and the decision is often based on your situation – how much time you have, how much time you want to spend, and how much money you have to invest. With managed funds you are getting:
• Diversification can mean average performance. A fund manager’s job is to make you a profit, and as such they will have your investment highly diversified for security. This does result in a profitable portfolio, however, there often nothing stellar about that performance.
• Management fees. Also coming out of your investment income are fund manager fees, financial product trials and financial planner retainers.
• Getting out of the market. If you experience an average year with your managed investment, it is not the responsibility of your fund manager to get you out of the market. That decision is yours, but if you want to get out, you can’t simply make a call and sell your shares.
• Expert advice and a team of investment managers. If you take the time to find the best investment fund manager, you will know that they are qualified, experienced, and backed by a team of advisors and researchers who have the time and the resources to make investment decisions, where you need to get on with running the rest of your life.
• You choose the level of risk. When you first meet with your investment fund manager, you will be able to explain your goals and your financial situation, to stipulate a level of risk you are comfortable with, and a return you would like to see.
• Compounding investments. It is also easy to reinvest your investment income and in this way you are compounding your investment returns, by earning returns on returns.
• Regular investment plan. Once you know where to invest, the more you invest, the more profitable your investment will be, so why not set up a regular investment plan where a percentage of your income each week is transferred to your managed investment fund.
• You can start with a small investment. When you are using a managed investment fund, you can often start with an initial investment of as little as $1,000 because you have access to certain investments at a fraction of their usual cost as you are sharing the cost with other members of the fund.

Don’t forget about the costs of managed investments, and make sure the benefits of these costs outweigh the deduction from your investment income:
• Approximately 4% set up fees which must be paid up front.
• Ongoing costs of around 2% per year.
• Exit fees dependent on your portfolio and agreement.

Benefits of DIY Investing

Don’t be daunted by going it alone, because the basis of investing in the stock market is choosing stocks which go up in price. This may sound overly simplistic but the information on listed companies is publicly available and if you take a little time to learn about the different companies and the types of stocks and investments available, you are immediately at an advantage.

You also need to remember that since you are making a DIY investment, you are probably invested in far fewer stocks. This gives you the chance to focus on each of your stocks individually and review their progress, and when you remain informed and in control, the health of your portfolio will follow.

Benefits of DIY investments which may suit you include:
• Minimal start up costs. There are no fund manager fees to pay and this means that more of your money can be invested, rather than simply paying to get you started.
• Higher potential returns. A fund manager is focused on making a profit for their clients, so their clients remain happy, and they are able to secure new clients on recommendations and a good track record. However, this can often mean a managed fund will play it very safe, whereas if you are in control you can seek out higher risks for higher returns.
• Keeps you ahead of inflation. With higher returns than a managed fund, your investment income returns are able to beat the three to four per cent inflation rate and maintain their value.
• Invest your dividends. You are able to compound your investment income by reinvesting your dividends, rather than having them paid out.

When making your own DIY investments, keep in mind that:
• You have limited diversity. With a smaller portfolio and less position in the market, you are less able to diversify your investments across a range of stocks. This can increase the riskiness of your portfolio, because if one or two of your stocks dip, the entire portfolio suffers.
• You pay brokerage fees. You still need the assistance of a broker when you make share trades and these fees will come from your profits.
• Higher risk. As a DIY investor you are more vulnerable to market forces and place a greater risk on your investment if you are not able to avoid these risks. As a DIY investor you often need to spend a great deal of time managing, reviewing and understanding your stocks and the market.

Remember, the important thing is that you are invested in the market in some way because you money will make more significant gains than sitting in the bank doing nothing. The way you get into the market is up to you, and depends on where you feel comfortable, and how much time you’re willing to spend on securing that comfort level.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison site.

This week, Michelle Edwards guest posted at CafeTax, Snow Day! Am I required to pay my employees for a snow day? Given the record snowfall many of us have seen this season, this is a great question for discussion. Michelle walks you through the rules, complex they may be.

My favorite Tax Blogger, Kay Bell posted A chink in the mortgage interest deduction armor? It seems this tax deduction isn’t so sacred, more talk of it getting reduced or going away altogether. For me, truth is that my mortgage interest is one fourth what it was when we bought the house. Principal paid to less than a third remaining and the interest rate dropped by a third through refinancing. I’m in favor of eliminating the second home deduction for interest, and even capping the deduction to interest on the first, say $500,000 worth of mortgage debt. We’ll see how this goes.

While we’re talking taxes, TaxGirl broke the news that IRS Okays Breastfeeding Supplies as Medical Expenses (but won’t agree that breast is best). The IRS made the right decision here, given the medical benefits of mother’s milk to the newborn, I think the tax deduction is minimal compared to the benefit to society of avoided health care expenses down the road.

The Oblivious Investor shared his own roundup along with some personal finance calculators. I still love my trusty Texas Instruments BA-35, but the online calculators are still cool.

And to wrap up this week, at One Mint, Do you know these 8 Investment Myths? Posts like this remind me that I can still learn from other’s mistakes and misconceptions. See if you don’t pick up a few tips here as well.

Have a great week ahead.
Joe

Not often I see a political cartoon that’s an homage to the late, great, Dr. Seuss. Mubarak is out. Good Riddance.

In case you are new to the word Roth, a Roth IRA is a retirement account (note – I’m in the US, and most of my tax related writing is going to pertain to US tax laws) which is the opposite of the traditional IRA. The traditional IRA let’s you deduct the deposit from your income and enjoy years of tax deferral, paying tax when you with the funds, presumably at retirement. A Roth IRA lets you make deposits with money that’s already been taxed, but the current law says it will never be taxed again, not even when withdrawn.

Now, the 401(k), 403(b) and starting this year, the 457(b) can have a Roth side, where similar to the IRA, deposits are post tax. Given the Traditional (pre-tax) 401(k) has been around for 31 years now, that’s quite the balance sitting there. Now, the IRS regulations permit you to perform an in-plan rollover, converting your employee retirement plan from the traditional to the Roth side if your employer has adopted the rules as well. The amount converted is taxable as ordinary income, and no penalty is due as might be for an early withdrawal.

I admit, there’s no absolute answer on whether converting to Roth, whether from an IRA or 401(k) is advisable. But I will point out, if you are in the 15% bracket, or lower, it’s worth considering. From my friends at Fairmark, I can see the marginal rates for 2011. For a married couple, the 15% bracket ends at $69,000. The exemptions and standard deduction add another $15,300, so total gross of $84,300 or lower and you are in the 15% bracket. My low-risk strategy is to convert just the amount to “top off” that 15% bracket, bringing your taxable income just to that $69,000 level. Note, if you convert your IRA, you are allowed to recharacterize back to traditional, a financial do-over, but this is not permitted within the 401(k) to Roth 401(k) process. So do the math, choose carefully, ask questions.